Remarks by District Attorney Tony Rackauckas
Premium Insurance Fraud
April 30, 2009
Thank you for coming. I have here with me Insurance Commissioner Steve Poizner, John Barrett representing the Franchise Tax Board, and Lisa Curtis, Chief of the Investigation Division of Employment Development Department.
Yesterday, a joint task force of investigators arrested a husband a wife at their multi-million dollar Tuscan style Laguna Hills home. This case is the largest known Workers’ Compensation Insurance premium fraud case in California’s history.
To make these arrests and seize the evidence it took: 14 Orange County District Attorney investigators, 7 investigative assistants, and a deputy district attorney, 7 California Department of Insurance investigators, 18 investigators from the Franchise Tax Board, 11 investigators from the California Employment Development Department, 2 Riverside District Attorney Investigators, and one court appointed receiver.
They have been working hard to search and seize property at six locations in two counties. Among the items seized were the $500,000 in jewelry you see in this room, over $50,000 in cash, and an application to the “Real Housewives of Orange County” reality show.
Right now, people are hurting. The ‘Real Citizens of Orange County’ are struggling to keep their houses, put food on the table, and pay for necessities.
This husband and wife team was living a lavish lifestyle -- a house with a $200,000 pool, driving two Ferraris, a Bentley, and a Range Rover, jet setting around the world, and power shopping at exclusive merchandisers like Bloomingdale’s, Chanel, Christian Louboutin, Gucci, Neiman-Marcus, Nordstrom, and Yves Saint Laurent. I don’t think they sell these brands at the Men’s Wearhouse, where I shop.
How did they support this lifestyle? By committing more than $38 million in premium insurance fraud and not paying their taxes. Unfortunately, this episode may be titled the “Real Insurance Fraud of Orange County.”
Michael Vincent Petronella, and his wife Devon Lynn Kile, 44, are charged with 106 felony counts including conspiracy grand theft, insurance fraud, and filing false tax returns, among others. If convicted on all counts, the defendants each face a sentence ranging from five years and four months to 102 years in state prison. Petronella and Kile are being held on $10 million bail each and are scheduled to be arraigned tomorrow.
Their company American Express Black card, which by law should only be used for legitimate business purpose, became a passport to personal excess -- almost $440,000 on jewelry alone from 2005 to 2008, more than $425,000 spent on shopping sprees at luxury stores in 2008.
As we all know, businesses are fleeing California as their ability to compete against companies in other states and around the world is crippled by skyrocketing Workers’ Compensation Insurance and state taxes. Recently, a ratings board recommended Workers’ Compensation Insurance rates be hiked up by 24 percent.
Premium insurance fraud is committed when an employer intentionally misrepresents to the State or his insurance company the number of employees, the nature of work performed by certain employees, the amount of payroll, and the loss history of a business.
These types of crimes hurt the economy and the free market system. If deceitful employers pay Workers’ Compensation Insurance at significantly lower rates, their competitors lose because it forces them to compete against a company with lower operating costs. Legitimate businesses are less competitive against crooked companies, who are able to under-bid their competitors due to lower business costs resulting from insurance fraud.
Committing insurance fraud fractures the economy. All legitimate businesses are burdened with paying more to insure their workers because deceptive under or non-reporting drives up the cost of insurance premiums. Committing insurance fraud also endangers injured employees who may be denied their workers’ compensation benefits for a work-related injury.
Finally, committing tax fraud hurts our infrastructure. Many critical governmental services, such as schools and police, are facing huge cut backs because there is less tax revenues available.
This case came to the Orange County District Attorney’s Office after a fraudulent claim was filed with State Compensation Insurance Fund, who then notified Mr. Poizner’s office and my office. We have been investigating this case along with the Franchise Tax Board and EDD since 2006.
Petronella is a roofing and general building contractor. Petronella and Kile own three businesses including Petronella Corporation, Western Cleanoff, Inc., and The Reroofing Specialists, Inc. (also known as Petronella Roofing).
Beginning in 2000, Petronella and Kile are accused of obtaining Workers’ Compensation Insurance for their three companies through the State Compensation Insurance Fund.
We expect to prove with the evidence we have obtained so far that:
* Between 2000 and 2008, the defendants fraudulently submitted 42 claims for uninsured injured workers and underreported $29 million in payroll to SCIF in order to reduce their Workers’ Compensation Insurance premiums.
*They engaged in a shell game scheme of shuffling payrolls to make fraudulent claims for uncovered injured worker claims Insurance premium losses exceeded $38 million. Using the names of three companies, they would list workers and their job duties in one versus the other three, depending on who was injured and how they could save money.
*They reported $2.9 million in payroll to SCIF, while having an actual payroll of $29 million. The $38 million premium due includes the $29 million in loss history plus penalties and assessments for inaccurate reporting.
*They engaged in an elaborate employee “cash pay” schemes, where they paid cash to a foreman, who distributed cash to the workers. This of course means the workers were not paying the proper taxes for their “under-the-table” pay.
*They didn’t pay $1.5 million in EDD payroll taxes, $1.2 million in state income taxes, and failed to secure and pay for appropriate Workers’ Compensation Insurance to the tune of approximately $38 million
*They underreported their income on their individual state income tax returns. Between 2005 and 2007, Petronella is accused of underreporting by more than $2.3 million and defrauding the state out of more than $632,600 in taxes, fines, penalties, and the cost of the investigation. Kile is accused of underreporting her income by more than $1.7 million during the same time and defrauding the state out of more than $530,000. We will be investigating how they reported their 2008 income.
*Between 2005 and 2007, Petronella and Kile claimed less than $290,000 of income on their tax returns, but spent more than $2.1 million on their American Express Black Business credit card for personal items.
This case is not only the highest premium fraud case in the history of our State, but is an example of living large on fraudlent gains. I want to send a message out there that these types of fraud hurt our economy, our infrastructure, and our workers. If you commit these crimes, you may be looking at the “Real jail cell of Orange County.”